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Taxes

Can you believe we’re already in September? The year has flown by, and IRS Tax Year 2016 will soon be coming to a close. While your filing deadline isn’t until April 17, 2017 (the 15th will fall on a Saturday), now is the perfect time to begin thinking about your taxes, maxing out your retirement contributions, and tying off of deductible expenses/donations.

So you can plan ahead, here are the IRS tax rates for your 2016 earnings, along with a little insight. Many of these have changed from last year, as they will almost always do in order to avoid a “bracket creep.” This is what happens when you get bumped up to the next tax bracket based on inflation, and not because you are actually earning more.

If you work for an employer, you’re probably very familiar with the taxes that are automatically withdrawn from your check each month. You are essentially prepaying your tax bill. Depending on how much you make before midnight on December 31, the number of exemptions you qualify for, etc., you will either owe additional money to the IRS or get a refund for overpayment. (Unless you’re a tax whiz who calculated your payments perfectly all year, of course, in which case you’re welcome to do mine, too!)

Curious how much the highest earners will pay in tax year 2016? The top marginal rate will again be 39.6 percent.

What are the 2016 marginal tax rates?

For those not well-versed in tax structure (which includes most people, I’d imagine), there’s a common misconception. Many people are afraid to earn more money because they don’t want to be bumped up into the next tax bracket. They don’t want to have all of their income taxed at an even higher rate than they’re already paying. Well, this is not actually how it works, as your effective tax rate and marginal tax rates are often very different. The only income tax applied at the highest rate, is on that income above and beyond the lower limits for that rate.

Confused? Let me explain further.

Pretent you make $50,000 this year. Or $5,000. Or even $500,000… the number is arbitrary. No matter what, your first $9,275 of earned income (if you file as a single individual, not jointly), will be taxed at the lowest tax rate: 10 percent. It doesn’t matter how many zeros are in that Income Earned box… your first $9,275 is taxed at 10 percent. This is called the “lowest tax bracket.” To determine your effective tax rate, you divide the amount of total tax owed by your entire income — if you don’t earn enough to get out of that lowest bracket, your marginal tax rate and your effective tax rate will be the same. Again, 10 percent.

This dynamic is why Warren Buffet says his secretary ‘pays more tax than he does.’ He earns a large portion of his income from investments, which are taxed at a lower percentage and therefore drop his average (effective) tax rate. As most of his secretary’s income (presumably) comes from wages, her effective tax rate is higher. I would still imagine that his actual tax bill is considerably larger than hers, however.

Let’s look at the chart:

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Most taxpayers can choose between itemizing tax deductions to reduce taxable income, which requires accurate record-keeping and support, and taking the standard deduction. The standard tax deduction is a fixed amount that reduces the amount of money on which year-end taxes are calculated. Generally, if you can show that you’ve had more deductible expenses than the amount of the default standard deduction, it’s better to itemize.

IRS publication 501 outlines each year’s deduction amounts. There are some cases where adjustments should be made to the standard deduction. For example, if you are 65 or older, or if you are blind, the standard deduction increases.

The personal exemption is another deduction to your income that you can take for yourself and for any dependents.

Tax Year 2016 2015 2014 2013 2012 2011 2010 2009
Single $6,300 $6,300 $6,200 $6,100 $5,950 $5,800 $5,700 $5,700
Married filing jointly $12,600 $12,600 $12,400 $12,200 $11,900 $11,600 $11,400 $11,400
Married filing separately $6,300 $6,300 $6,200 $6,100 $5,950 $5,800 $5,700 $5,700
Head of household $9,300 $9,250 $9,100 $8,950 $8,700 $8,500 $8.400 $8,350
Personal exemption $4,050 $4,000 $3,950 $3,900 $3,800 $3,750 $3,650 $3,650

Note: When you file taxes in April 2017, you’re actually filing for your 2016 earned income. Review the numbers in the 2016 column and understand the federal tax brackets.

A dependent child can increase the standard deduction by as much as $1,000, if certain requirements are met.

Do you itemize your tax deductions or take the standard deduction?

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Tax Day 2016 for IRS Tax Year 2015, also known as your return filing deadline, is April 18.

If you haven’t yet filed, here are the IRS tax rates for your 2015 earnings with background and commentary. These change from year to year to protect against something the Tax Foundation calls “bracket creep” or when you get bumped up based on inflation not because you got a nice raise or found a higher-earning job.

Curious who will pay the most for tax year 2015? The top marginal rate is 39.6%.

Looking for your federal refund status? If you’ve already filed you can use this part of the IRS website to check.

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What are the 2015 marginal tax rates?

The following was written by Luke Landes and edited by Consumerism Commentary for length and clarity.

There’s a big misconception about taxes. People are afraid to earn more if it means they’re going to be “bumped into the next tax bracket.” It is not true that being in a higher tax bracket will cause all of your income to be taxed at a higher rate. The only income tax at the highest rate is the income you earn above and beyond the lower threshold for that rate.

Make sure that sinks in. You will always owe the lowest tax rate, 10 percent, on your first $9,225 of earned income if you file as a single individual (not filing jointly). You could be a CEO earning $5 million this year, but even still, your first $9,225 is taxed at 10 percent. That’s how the brackets work.

So if your total taxable income is $9,000, you owe 10 percent of that, or $900. In this case, your marginal tax rate, 10 percent, is exactly the same as your effective tax rate. You get your effective tax rate by dividing the amount of total tax you owe over your total income. This is what Warren Buffett has famously referred to when explaining how his secretary pays more tax than he does. Buffett earns a lot of income from investments which are taxed at a lower rate than earned income, and that smaller percentage affects the average — the effective tax rate for all his income.

One more thing to keep in mind is that if you are employed and your employer takes tax payments from your paycheck automatically, you pay your 2015 tax bill throughout the year. The total tax you owe when you file your tax return takes that into account. If your total tax bill is less than what you’ve paid to the federal government throughout the year, you’ll get a refund. If you haven’t covered your entire bill through paycheck withholding, you owe the government.

The 2015 federal income marginal tax rates and brackets by filing status.

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New baby? No doubt this new arrival has turned every aspect of your life upside down in the best possible way. Now is the time to make sure your financial house is in order. Here’s a 10-step account and financial checklist to lay the groundwork for your little one’s successful future.

New account checklist for new babies

1. Apply for a Social Security number for the baby: An SSI number is the linchpin to open a bank account in your child’s name, purchase savings bonds, obtain medical coverage and access government benefits.

2. Review your life insurance: If you don’t have life insurance, you should get coverage as soon as possible. If you already have a life insurance policy, check to make sure it’s adequate to cover the needs of the new addition to the family.

3. Pick a guardian: Choose a family member or close friend who is willing and financially able to care for your child, should you or the other parent pass away or become incapacitated before your child turns 18.

4. Set up powers of attorney: Put in writing your legal power of attorney, which sets out who will be responsible for your financial and personal affairs should you be unable to make those decisions for yourself. You also should set up a health care power of attorney that makes your wishes known in the event you become seriously ill and are unable to participate in decisions about your care.

5. Write your will: It’s not just wealthy people who need a will. Every parent should create a document spelling out how his or her estate should be handled. The will may also include or reference legal guardianship and powers of attorney.

6. Open a savings account in the baby’s name: Choose a no-fee, no-minimum balance, online savings account. You can link the savings account to your checking for automatic withdrawals.

7. Set up an emergency fund: You should put aside money from each paycheck into a savings account with the goal of having sufficient funds to cover living expenses for six months.

8. Review your work benefits: Confirm how much paid (and unpaid) maternity leave is offered through the birth mom’s employer, and whether paid leave is available for the other parent. Determine how you will obtain health benefits for the baby, either through an employer or government plan. Consult with your human resources office on flexible spending accounts and other benefits that may apply to your situation as a new parent.

9. Check in with Uncle Sam: You can claim a tax credit of $1,000 for your new baby and take an annual tax deduction of $3,950 for each dependent child. You can also receive tax credits if you adopt a child and/or if you pay for child care. You should review your withholding status, which could mean that more take-home money is available to increase your emergency fund every month, for instance. Single parents may be able to claim head-of-household status.

10. Start saving for college: Set up a 529 savings account, which generally is not subject to federal and state taxes if used to pay for college tuition. (If the funds are used for other purposes, earnings may be subject to a 10 percent federal tax penalty.) Details on fees and other aspects of the 529 plans vary by state, so do your research.

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The IRS Tax Scam and What Happens When You Owe Taxes

by Luke Landes
Telephone

For a few years, a ring of criminals believed by the U.S. government to be based in India have been involved in a pervasive tax scam. Callers impersonate IRS officials, connect with American taxpayers, and convince many that they have an outstanding bill for tax payments. The scam has been so pervasive that it has […]

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401(k) Contribution Limits for 2016

by Luke Landes

The 401(k) contribution limits and maximums are increasing in 2015, and there are other tax changes to 401(k) to note.

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2014 Federal Income Tax Brackets and Marginal Rates

by Luke Landes
Taxes

Anyone who likes getting a look at their future tax expenses might be interested in seeing what next year’s tax brackets and tax rates will be. The IRS has now announced the official rates and brackets for 2014, although the numbers have been predicted for months because the IRS uses a simple process of inflation […]

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5 Responsible Uses for Your Tax Refund

by Luke Landes
5 responsible uses for your tax refund

For most citizens of the United States, tax season is over. There’s no longer a need to run around gathering documents. You’ll stop seeing television commercials for TurboTax and H&R Block in which each insinuates the other is a deficient company. You can stop thinking about government’s wasteful spending and income redistribution — which always […]

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Should Public Employees Go Bowling?

by Luke Landes
Bowling

Whether you’re watching a twenty-four hour news channel, the local news, or national news “magazine” programs like 20/20 and 60 Minutes, the program directors need to be concerned about ratings. Television ratings are everything to those who work in this industry. If you can’t get an audience to watch a program, there are no eyes […]

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TurboTax vs. H&R Block: The Battle

by Luke Landes
H&R Block Tax Professional

As the I.R.S. is now accepting federal income tax returns, a war is intensifying. The war is between the major tax preparing companies. Intuit’s TurboTax, with its online and desktop software, and H&R Block, with its storefronts and online software, are the major opponents, and the battlefield is media, and the warriors are their advertising […]

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